Why Amazon Just Declared War Against Square, PayPal, and Google

Amazon (NASDAQ: AMZN  ) recently declared war on the mobile payments industry with Amazon Local Register, a card reader similar to dongles offered by Square and eBay's (NASDAQ: EBAY  ) PayPal.

What makes Amazon Local Register such a threat is that it undercuts all of its competitors. Amazon is offering a promotional rate of 1.75% per card swipe on credit and debit cards until Jan. 1, 2016. After that, the rate will rise to 2.5% per swipe, which is still cheaper than any competitor -- Square charges 2.75% per swipe, PayPal charges 2.7%, and Google (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) Wallet charges 2.9% per transaction. Amazon is also basically giving away the card reader for free, since its $10 price tag is erased by $10 in transaction credit.

Amazon Local Register. Source: Amazon.

Let's take a closer look at Local Register to better understand what Amazon plans to gain from this aggressive new strategy.

The business of mobile payments
Amazon's plan is squarely aimed at small brick-and-mortar businesses, the same market that Square, PayPal, and Google have pursued.

The theory is simple -- the clunky old point-of-sale, or POS, systems will eventually die out in an era of smartphones and tablets. Research firm IHL Group forecasts that mobile POS devices will replace 12.4% of traditional POS systems in North America by 2016. According to TechNavio, the global markets for POS system software and hardware will respectively be worth $3.2 billion and $31.5 billion by the end of 2014.

PayPal offers three products to replace POS systems -- a $15 card-reading dongle, a Bluetooth device known as Beacon that allows customers to check in and pay at stores hands-free, and a stand-alone mobile chip and card reader that costs around $120.

Square's business is heavily centered on mobile devices. It offers Reader, its card-swiping dongle for iOS and Android, for free. Its full POS system, Stand, costs $99 and converts iPads into sleek checkout registers. Register, an app for iOS and Android devices, can accept manually entered credit card payments. Square also offers Market, which is like a reverse version of Amazon -- customers who use Square's POS systems can also advertise their wares online through the site.

Square Stand. Source: Square.

Google doesn't offer card readers or POS systems -- it relies completely on near field communications and online transactions. But like PayPal, Google offers a Google Wallet card, a physical debit card that can be used at participating retailers. Square recently canceled its plans to launch a similar card.

PayPal, Square, and Google all help participating businesses track customers and sales trends -- a feature that Amazon's Local Register will also offer.

Circulating money back into Amazon's ecosystem
Amazon's grand plan is to combine its massive e-commerce presence with brick-and-mortar businesses into a single, seamless payment ecosystem.

With brick-and-mortar stores, Local Register is a simple idea that could spread like wildfire, since the average POS system can cost up to $1,500 and even more to upgrade. In addition to the card reader, Amazon is also selling accessories, such as cash drawers, receipt printers, and stands, so small businesses can assemble a modular, "buy what you need" POS system.

Amazon already allows online stores to pay with their Amazon accounts. The idea is similar to Facebook's login strategy on other websites -- letting Amazon handle the transaction is simply an easier alternative to typing in all of your credit card information again.

An interesting aspect of Local Register is that while funds are transferred into a seller's bank account the next business day, they immediately become available on Amazon.com, and could possibly encourage sellers to spend some of their earnings on Amazon's products and services.

The Foolish takeaway
In conclusion, eBay and Square clearly need to watch their backs. Amazon has never been shy about taking losses to achieve long-term goals, and it certainly has the market presence and firepower to level the mobile payments market. Google doesn't have much to lose, since Wallet has yet to catch on, but it could be letting Amazon claim a market that it could have dominated with more aggressive tactics.

Amazon is frequently criticized for headline-grabbing gimmicks -- such as drones, barcode-scanning pens, and head-tracking smartphones -- but I believe that Local Register is a solid, smart strategy that leverages the company's greatest strengths to bridge the gap between brick-and-mortar and e-commerce.  

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